Real Option Valuation

This chapter elaborates the real option valuation. A contingent claim or option pays off only under certain contingencies if the value of the underlying asset exceeds a pre-specified value for a call option, or is less than a pre-specified value for a put option. An option can be valued as a function of the following variables, the current value, the variance in value of the underlying asset, the strike price, the time to expiration of the option and the riskless interest rate. A discrete-time variant, the binomial option pricing model, has also been developed to price options. An asset can be valued as an option if the payoffs are a function of the value of an underlying asset. It can be valued as a call option if the payoff is contingent on the value of the asset exceeding a pre-specified level.